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Basics of the democratic capitalist order
The big question
Are democracy and free market compatible?
- For most of history, belief that they can't go together
- Today belief that must be compatible - eg, End of History = democracy + capitalism
Ways the combination can fail
- Citizens put constraints on free market
- Free market puts constraints on citizen rule
Things to know
• Incompatibility of democracy and capitalism
- 19th c. fears, rationality of expropriation
• Reasons why people don't vote to expropriate
- Incentives - it doesn't help
- Ideology - it's wrong
- Politics - it's impossible
• Capitalism undermining democracy
Things to know
• Prewar: long liberal 19th c, free markets but limited democracy, first globalization
• Interwar challenges
- Integrating working class
- Questions about legitimacy of capitalism
- Failures of liberalism and attractions of left & right
Things to know
Postwar politics
- Catch-all party - nature & origins, Social and Christian democracy
- End of ideology, discrediting of extremes Postwar economics
- Postwar bargain = embedded liberalism & politics of productivity
- Keynesian welfare state
- 30 Glorious Years
Things to know
Breakdown
- New social movements & identity politics
- Postmaterialist values, Maslow's hierarchy
- Keynesian welfare state as victim of success
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Debate: Workplace democracy
• Should workers have a right to ownership in their workplace? Or a right to participate in collective decisions in their workplace?
Arguments in favor
• Firms are like states - exert coercive power over employees (high exit costs), therefore a right to govern
• Workplace democracy creates more meaningful work
• Workplace democracy builds civic virtue, democratic habits
Arguments against
Worker ownership less efficient - too many workers, less monitoring, too much risk - If better, why not more examples? How to change current system - do workers want control, how to get it
Illiberal - restricts freedom of owners and workers
Discussion questions
1. Why no expropriation
• Why don't the poor expropriate the rich in a democracy? Which of Putterman's explanations are most persuasive to you?
• What weight would you put on (a) incentives, (b) ideology, and (c) politics or other things?
• Do these weights differ by time period or country?
2. Indoctrination
• Are citizens indoctrinated to believe that private property should be inviolable and expropriation is wrong? Or is this something that is hard-wired in our brains?
• If there is indoctrination, how does it happen -at home, in schools, through religion? Can you give examples of the ways that we are convinced to respect the wealth of the rich?
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3. Getting to embedded liberalism
• Why was it so hard for industrialized countries to find the postwar settlement? It seems obvious in retrospect - the rich get mostly free markets and the poor get a welfare state.
• Could the problems of the interwar period have been avoided? How?
4. End of history?
• Does the postwar settlement of competitive party democracy & the Keynesian welfare state represent the answer to the main political and economic questions of the modern world? Is it the end of history in Fukuyama's terms?
• What is missing from this solution? Can we do better than this? Or should we be happy that we have at least this much?
5. Breakdown of postwar settlement
• In 1983, Offe saw that the postwar bargain was breaking down. Was he right? Did the problems he saw come to fruition? Were there other problems that he missed? What were they?
• Recall that he points to new social movements, corporatism, and high taxes & high benefits suffocating the economy
6. Materialism & postmaterialism
Are people more motivated in politics by material or non-material values? Do they tend to vote for parties whose policies will benefit them economically or for parties whose policies appeal to them in other ways? How has this mix changed over time? Are we headed towards a more or less materialistic politics?
Self-actualization
morality, creativity, spontaneity, problem solving lack of prejudice, acceptance of facts
Esteem
self-esteem, confidence, achievement, /respect of others, respect by others^
friendship, family, sexual intimacy
security of body, of employment, of resources, of morality, of the family, of health, of property
Physio log !Ca I /'Jreat'1'n9' rood' water, sex, sleep, homeostasis. excretiorA
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Today
• Incompatibility of democracy & capitalism?
• Explanations for compatibility
• Democracy & capitalism pre-WWII
• Postwar settlement
• Is the postwar settlement breaking down?
Incompatibility of democracy & capitalism
19th c. fears
• Thinkers of all stripes in 19th c. agree on what would happen if all citizens can vote
• The mass of poor will expropriate the minority of rich - very high tax rates, nationalization of land, business
• They differ on solutions
- Mill (liberal): extra votes for the rich and educated
- Marx (communist): rich will never allow democracy to happen until they are violently overthrown
Democracy versus market
• In democracy votes are distributed equally (one man, one vote)
- Though consider US Senate, rotten boroughs
• In free market economy, wealth distributed
un>
Equality of vote > inequality of wealth
• We have a referendum on the tax rate and subsequent redistribution
• If people voted based on pure short-term self-interest, a 100% tax rate and equal distribution would gain most votes
• Almost everyone would benefit except very top incomes
Fears of expropriation not fulfilled
• When countries become democratic, they don't tend to expropriate the rich (Western Europe, North America, etc)
- In fact, newly enfranchised voters sometimes quite conservative
- Though democracies do have larger welfare states
• Cases of expropriation (eg, communist countries) are not democratic
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Explanations for lack of expropriation
The puzzle
Why does it appear that democracy doesn't eliminate the market?
Why are they compatible given incentives to expropriate?
Reason 1: Incentives
• In long-term, redistribution and expropriation might actually hurt the poor
• Income taxes reduce incentive to work for most productive
• Wealth taxes reduce savings and investment - Also capital flight and evasion, unpopular
Reason 2: Ideology
• Poor may be convinced that redistribution is wrong
• Moral legitimacy of wealth
- Are people wealthy because of effort & talent or luck & cheating?
• Amenity value
- We derive pleasure from Kardashians
• Lottery factor: I or children might become rich
• Ignorance: Not aware of other possibilities
Indoctrination
Are citizens indoctrinated with these ideas by the rich?
- Is media biased? Which direction?
- What about schools? Were you indoctrinated to believe in sanctity of ownership?
Three faces of power: decision-making, agenda setting, ideology
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Reason 3: Politics
Rich have more influence on democratic decisions than poor - can hijack political process
- Rich more likely to participate in politics
- Rich give more campaign donations
- Going Galt/capital strike
Most political systems limit majority rule
- Thus tend to favor the status quo - minorities can block policy change
The reverse path: 18th Brumaire
Capitalism destroys
democracy
Louis Napoleon seizes
power with help of
capitalists and financiers
(1851)
Capitalists fear workers and so repress, especially when workers organized
Reason 4: Other issues
The poor care about income, but they also care about other things
- Abortion, homosexuality, guns, immigration May vote for values candidates more than redistributionist ones
- Is it false consciousness or genuine feeling? Is it true? Do poor vote against their self-interest
Democracy => Markets?
Both based on principle of liberty
- But democracy has equality and markets inequality
Central planning requires strong restrictions on behavior => strong repressive state
- Need to stop people becoming rich or leaving
- Consider Venezuela's path
But free markets may go with dictatorship
- Both based on inequalities
Capitalism and democracy
	Democracy	Authoritarian
Market	Almost all	Much of
	industrialized	developing
	states + others	world
Central		Communist
Planning	None?	states
Democracy & capitalism pre-WWII
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The long 19th century
High tide of economic liberalism
- Expansion of markets and industrialization
- Limited state intervention in economy
- Most globalization until present But limited democracy
- Workers & peasants mostly excluded
- Franchise increasing but slowly
Value of exported goods as share of GDP
Estimates correspond to merchandise export-tc-GDP
1627 1840 1860 1SI Saure* Fouqum snd Hugat (CEPII MI6)
WWI and the end of the liberal era
• War as failure of old elites & old ideas
• End of era of peaceful coexistence and trade
- Rise of economic nationalism and protectionism
- Culminates in Great Depression
• Disappearance of liberal center
- Radicalism on left - communists, Marxists
- Radicalism on right-fascism
Challenge of interwar politics
• How to integrate lower classes into politics
- Price of war often universal male suffrage
• Workers challenge hierarchical control of factories & capitalist order
- Don't like wage labor & bosses
• Dominant liberal parties offer civil rights, but workers want economic and social rights
Two economic challenges for capitalists
Reestablish legitimacy of owners and capitalism - some success Deliver the goods: strong growth, employment, security & wages - often fail
- Traditional elites & liberals have trouble responding to Great Depression
Justifying hierarchical control
Scientific and productivity arguments to justify hierarchy
- Taylorism = scientific management of production
- Managerial mystique
Ally with state to repress workers and keep out of power
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But failed response to depression
• Great depression hurts workers badly
• Liberal state doesn't help
- Commitment to gold ■™™WB™>™.
standard and balanced budgets
- Not willing to spend
- But learning...
industrial production, (1919 - IOO)
Fear of left => Right-wing politics
• Interwar left usually committed to revolutionary path to socialism
- Bernstein's moderate social democracy becomes popular later
• Used to justify right-wing authoritarian rule
- Mussolini comes to power to stop Reds
- Hitler wants to destroy communists & socialists
Attractions of the right
• Polanyi argues that reaction to free market (double movement) can lead to left or right
• Fascism and traditional right-wing have genuine appeal in interwar period
- Offer sense of community and protection
- Aren't such a threat to traditional values as communism
Three interwar ideologies
• Liberal democracy has few answers
- Only rights, no community or politics
• Communism attractive to a minority
- But most revolutionary, threatening
• Fascism & right-wing most genuinely popular
- Build on traditions & frustrations with industrialization
- Present real solutions - sense of community
In sum
Democracy and capitalism don't seem compatible during interwar era
- Capitalism not benefiting workers esp. after Depression
- Workers want to take control of factory floor
- Workers represented by left-wing parties that support revolution
- Right provides alternative national community Workers not well-integrated into politics
Postwar settlement
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Postwar settlement
• Solution to problems of interwar era
• Capitalism in exchange for welfare state
• "Politics of productivity" - focus on economic growth rather than division of pie
• This time it works
- Labor shows restraint - social democracy
- Capital accept budget deficits
Nature of postwar order
• Economic order
- Liberal international economy: free markets
- Keynesian welfare state: government intervention and safety net
• Political order
- Competitive party democracy
- End of ideology
Why not before?
Extremist ideology especially on right discredited by war
- The End of Ideology
New right dominated by centrist Christian Democracy
Deradicalized left - creation of social democracy by Bernstein
- WWII weakens unions
- Cold War & anti-communism
DANIEL BELL
On the Exhaustion of Political Ideas in the Fifties
THE END OF IDEOLOGY
Competitive party democracy as source of stability
• Mass participation organized through large-scale bureaucratic parties moderates radicalism
• Imperatives of winning elections
— Need to appeal to largest # of voters
— Need to form coalition govt with others
• Successful party needs bureaucracy, hierarchy
— Professional leadership has different interests
— Ordinary members deactivated
Mass Party versus Catch-all Party
Mass Party - Pre-WWII Catch All Party - Post-WWII
■ Large numbers of members ■  Lesser role of individual & who participate in party stronger top leadership
■ Claim to represent a social ■  Electoral victory prime goal class - workers > ideological purity
■ Strong ideology ■  Deemphasis of class •  Cradle to grave services and       mission, more
socialization - subculture heterogeneous supporters
■  Claim to represent nation
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Why does catch-all party emerge?
• Change in campaigning: money > labor, mass media
• Less social and professional stratification => weaker class divisions
• National societal goals > group interests
• Greater prosperity => less appeal of revolution
• De-ideologization of political life - everyone accepts rules
Keynesian welfare state (KWS) as source of stability
• Labor accepts free markets and private property in exchange for guarantees of employment and reasonable standard of living
- Deficit spending to reduce business cycle
- Welfare state as safety net
• Bargaining over share of pie, not nature of pie
• Without KWS, more intense social conflict and radical solutions to avoid wage labor
Changes in ideas
• State willing to take a larger role in economy
- War and depression discredit old orthodoxies -gold standard, balanced budget, laissez-faire
- New ideas from Keynesianism
• Desire for quiet, private life after politicization
of interwar and war years
DER MARIA BRAUN
Re-embedded economy
• Polanyi claims that the best economy is one that is embedded in social order - not detached market
• Postwar order arguably re-embeds the economy
- Market aimed at social ends
- Ruggie: Embedded liberalism
Les trente glorieuses • The thirty glorious years - 1945-1975 - High investment => high growth		
- Rising wages - Falling inequality - Modern life (cars, refrigerators, TVs) extended to all society • Enables moderate politics		
Is postwar settlement breaking down?
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The End of History
• Written by Fukuyama in 1989 just before fall
• Triumph of democracy and capitalism as best way of organizing society
• What kind of triumph?
- Weak claim: They have won the battle of ideas
- Strong claim: All countries are/will be accepting them
Evidence
• Competing ideas have lost appeal?
- Most countries call themselves democratic
- How many support alternatives to market?
• Practical triumph
- Fall of communism, Third Wave, but since?
• These forms best fit human desires
- Democracy: desire for recognition by equals
- Market: desire for distinction
Is settlement breaking down?
• Competitive party democracy?
- New social movements based on identity and demands for autonomy
- According to Offe rise of corporatism, but maybe instead EU & democratic deficit
- Cartelization of parties and decline of alternatives
- Maybe add: rise of populism, nationalism, xenophobia, religion, regionalism?
Postmaterial values
• Maslow's hierarchy of needs
- Postwar prosperity meets material needs
- Young people socialized in this order move to higher order needs rather than material ones
• Postmaterial values: identity, environment, gender, sexuality
-Also: religion, nationality, family?
• Have they replaced material interests?
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Self-actualization
morality, creativity, spontaneity, problem solving, fack of prejudice, acceptance of facts
_
self-esteem, confidence, achievement, /respect of others, respect by others\
friendship, famityj sexual intimacy
Safety
security of body, of employment, of resources, of morality, of the family, of health, of property
PhysiO log JCa I /breathing, *0°d- water, sex, sleep,
homeostasis, excretion \
Is settlement breaking down? (2)
Keynesian welfare state?
- Loss of incentives to work because of security -Too large a burden on state
- High taxes suffocate middle class
- Avoids creative destruction
- Can't stop rising inequality
What happens next?
• After "30 Glorious Years" comes instability and change
- Economic problems: oil, stagflation
- Political difficulties: Winter of our discontent
• Is Competitive Party Democracy + Keynesian Welfare State solution to human problems?
• End of History or Something new? What is the next thing?
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